Stocks fell near bear market levels as the market lowered the odds that the Fed can successfully avoid a recession with the need to battle high inflation. While stocks likely decline past a bear market level, the rebound is typically explosive and happens before the economy recovers.
Stocks took it on the chin last week as the market repriced the odds that the Federal Reserve (Fed) can tame inflation and avoid a recession. May consumer inflation (CPI) hit a forty-year high at 8.6% year-over-year, while economists expected the level to hold steady at 8.3%. In addition, the level of “sticky” inflation, which will be more difficult to curb, rose to 5.2% year-over-year. Lower-income families, in particular, feel the pinch from the increase in food and fuel prices, though, and are forced to forego spending on other items due to the price increases. Pressure continues to build on households as gasoline prices hit a new high above $5 per gallon last week. In the wake of the hot inflation reading, markets quickly priced in an additional hike of 25 basis points (0.25%) over the next 18 months. The markets expect ten rate hikes of 25 basis points from the Fed over the next year and a half. Most rate increases are expected within the next few months as the Fed plays catch-up with rampant price pressures. Fed Fund futures are discounting at least a 50 basis point (0.50%) hike on Wednesday, July, and September. Investors will be on edge listening for a possible acceleration of the tightening in monetary policy to 75 basis point increments. The good news is that a very aggressive path of rate increases is already discounted by market participants, so this week is not destined to repeat the pain in the stock market that characterized last week’s trading.
